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Wall Street surprised that Chevron dropped US$33b bid for Anadarko

Risk arbitrage traders and analysts are surprised that Chevron decided to walk away from Anadarko Petroleum.

[NEW YORK] Risk arbitrage traders and analysts are surprised that Chevron decided to walk away from Anadarko Petroleum. A survey conducted Wednesday by Bloomberg News showed that a vast majority had expected Chevron to raise its bid.

The energy giant Chevron on Thursday quit a bidding war for Anadarko Petroleum, ending the industry's fiercest takeover battle in 15 years. Chevron bowing out leaves  Occidental Petroleum, a much smaller rival that is backed by billionaire investor Warren Buffett, poised to become the dominant force in the largest oil field in the United States.

Chevron's decision to drop its US$33 billion bid for Anadarko and instead walk away with a US$1 billion breakup fee came less than a month after the two companies had agreed to a deal.

According to a survey of 21 risk arb traders and analysts, 81 per cent expected that Chevron would increase its bid for Anadarko, maybe outbidding Occidental. Only 5 of 21 didn't expect Chevron to come back with a higher offer.

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Occidental shares, which earlier fell the most since late 2016, reflect that surprise as Wall Street appeared to believe that Chevron would end up the winning bidder for Anadarko.

Anadarko fell as much as 3.4 per cent, the most intraday since March 22 on more than three times average daily volume, as investors realised no higher bid was coming.

Chevron chief executive Michael Wirth, who had touted the deal with Anadarko last month, said it was now walking away because it did not want to overpay.

"Winning in any environment doesn't mean winning at any cost. Cost and capital discipline always matter, and we will not dilute our returns or erode value for our shareholders for the sake of doing a deal," Mr Wirth said in a statement.

Analysts have expressed concerns that the purchase would leave Occidental with too much debt.

The battle for Anadarko - a midsized US oil company based in Houston - officially began April 12, when Chevron unveiled a transaction valuing Anadarko at US$65 a share. However, barely two weeks later, Occidental announced a competing bid of US$76 a share and released a letter from chief executive Vicki Hollub to the Anadarko questioning why Anadarko had refused to entertain her company's superior bids before announcing the Chevron deal.

The battle has centered on Anadarko's robust position in the Permian Basin, an oil-rich region in West Texas and New Mexico where Occidental and Chevron also have substantial holdings.

Both companies viewed the Anadarko assets as critical in allowing them to boost production while keeping costs in check through economies of scale.


Occidental sweetened its bid by announcing it had received US$10 billion in financing from Mr Buffett's Berkshire Hathaway.

Then on Sunday night, Occidental announced a preliminary deal to sell Anadarko's Africa assets to French company Total for US$8.8 billion, and adjusted the terms of its offer to increase the portion in cash and lower the payment in shares.

Ms Hollub said the second offer removed the need for an Occidental shareholder vote on the takeover, and cleared up an issue Anadarko raised during the talks. Chevron's bid did not require a shareholder vote.

She said the Anadarko deal represented a "transformational" opportunity for Occidental, telling Wall Street analysts the company has "a tremendous asset base with a huge upside."

But the deal has not been popular with all shareholders. T. Rowe Price, which holds 2.8 per cent of Occidental, has said it would oppose the Occidental board of directors at Friday's annual meeting because it won't hold a vote on the Anadarko transaction.

Moody's has placed Occidental under review for a possible credit rating downgrade due to high debt.

"We regard the extent of this over-leveraging as problematic, leaving the company with less flexibility to confront an environment of weak commodity prices, and significantly heightening the urgency of debt reduction," Moody's said in a research note on Wednesday.